Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$82m, Community First Bancshares Inc’s (NASDAQ:CFBI) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Community First Bancshares’s bottom line. Since the level of risky assets held by the bank impacts the attractiveness of it as an investment, I will take you through three metrics that are insightful proxies for risk.
How Good Is Community First Bancshares At Forecasting Its Risks?
The ability for Community First Bancshares to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provision covers more than 100% of what it actually writes off, then it is considered sensible and relatively accurate in its provisioning of bad debt. Given its high bad loan to bad debt ratio of 105.92% Community First Bancshares has cautiously over-provisioned 5.92% above the appropriate minimum, indicating a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.
What Is An Appropriate Level Of Risk?Community First Bancshares’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Generally, loans that are “bad” and cannot be recovered by the bank should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of Community First Bancshares’s profit. Since bad loans only make up 1.67% of total assets for the bank, it exhibits prudent bad debt management and faces an industry-average risk of default.
Is There Enough Safe Form Of Borrowing?Community First Bancshares makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Community First Bancshares’s total deposit to total liabilities is very high at 94% which is well-above the prudent level of 50% for banks, Community First Bancshares may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.
How will CFBI’s recent acquisition impact the business going forward? Should you be concerned about the future of CFBI and the sustainability of its financial health? I’ve bookmarked CFBI’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for CFBI’s future growth? Take a look at our free research report of analyst consensus for CFBI’s outlook.
- Historical Performance: What has CFBI’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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